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December 19, 2012

Best 5 Investment Picks for 2013

Housing, consumer goods, health care and the emerging markets’ growing middle classes show promise for next year

Some of Wall Street’s experts offer their investing insights.

Stocks, not bonds, will likely feature as the best investment picks for 2013.

Over the course of the fourth quarter of 2012, AdvisorOne kept an eye out for where investors should put their money next year, and one thing is clear: Investors seeking yield–isn’t everybody nowadays?–will find more joy in equities than in fixed income, according to Wall Street’s top financial analysts.

“As we begin to observe evidence that policy is successfully stimulating growth, we expect to see the initial stages of the ‘Great Rotation’ from bonds into stocks later in 2013,” says the Bank of America Merrill Lynch Global Research team in a comment published on Dec. 11.

Both BofA-Merrill and S&P Capital IQ predict that the S&P 500 Index will hit the 1,600 mark in 2013.

Where are the best stocks to be found? The Consumer Discretionary and Consumer Staples sectors offer access to the growing middle classes in emerging markets. The Health Care sector also looks to be strong for 2013, and should see gains now that President Barack Obama’s Affordable Care Act is a reality. For investors who want equity exposure without buying individual stocks, mutual funds and exchange traded funds can also lead to yields in these sectors.

“Next year, we think it’s all about the consumer,” says Brian Peery, co-portfolio manager of the Hennessy Cornerstone Mid Cap 30 institutional fund (HIMDX). “The housing market is rebounding in a low to moderate growth environment. We expect GDP growth of approximately 2%.”

The trouble, notes Peery’s colleague Neil Hennessy, is that consumers may be buying goods at Pier 1, but they’re not investing in Pier 1 stock. “Retail investors will get back into the market when interest rates go up,” he says.

Judging from the best five investment picks for 2013 below, uncertain investors might want to take the plunge into stocks before that happens.

1) U.S. Housing

Peery, of Hennessy Cornerstone, likes the housing subsector within the Consumer Durables sector. Specifically, he names U.S. homebuilders including Standard Pacific (SPF) and KB Homes (KBH). Year-to-date total returns as of Dec. 12 came to 114% for SPF and 129% for KBH, according to Morningstar.

BofA-Merrill Lynch’s researchers lend support to Peery’s picks, noting in a comment published on Dec. 11 that U.S. home prices are expected to rise 3% in 2013. This rise would add to the 5% gain in 2012.

“Housing starts could increase by more than 25%, and a 3.5% average annual appreciation over the next 10 years should stimulate jobs to construction and related sectors such as furniture, building materials and financials,” the researchers write.

2) Global Consumer

At separate media briefings in New York on Nov. 13, both Morgan Stanley Chief Investment Strategist David Darst and MFS Investments President and Chief Investment Officer Michael Roberge mentioned U.S.-based Johnson & Johnson (JNJ) as a company with U.S. headquarters which offers access to three fast-growing markets: consumer staples, health care and emerging markets.

Similarly, Morgan Stanley Deputy CIO Charles Reinhard thinks global equities are currently unloved and under-owned, and he likes what he calls “global gorillas”– consumer-sector companies such as Pepsi, Tesco and Nestle that sell a lot of products to the growing middle classes in the emerging markets.

The Consumer Discretionary sector has an overweight recommendation from S&P Capital IQ’s U.S. investment policy committee as of Dec. 11, with the sector up 20.5% as of that date.

3) Health Care Stocks

Health care’s returns have outpaced the market over a multiyear period, and the sector’s outlook for 2013 depends on the success of reforms that will start taking place in Obama’s second term, according to Dr. Mark Bussard, a research analyst in the U.S. Equity Division of T. Rowe Price.

As of Sept. 30, T. Rowe Price Health Sciences Fund (PRHSX) average annual total returns were 35.25% year to date and 47.93% for the one-year period. The fund’s top holdings include Catamaran (CTRX), a pharmacy benefits manager and established Medicare Part D player, and Gilead Sciences (GILD), whose HIV medicines Bussard credits for dramatically transforming the standard of care of HIV therapy.

The Health Care sector has an overweight recommendation from S&P Capital IQ’s U.S. investment policy committee as of Dec. 11, with the sector up 15.6% as of that date.

Among THDAX’s top 10 positions as of Aug. 31, Kaufman’s EM company picks include Puregold Price Club Inc., the second largest modern retailer in the Philippines, and Cetip S.A., which facilitates banking, fixed income and over-the-counter derivatives registration in Brazil.

Global population growth and lifestyle upgrades should drive long-term demand for real assets, meaning consumer products that relate to food, shelter and energy, said MFS Investments portfolio manager Linda Zhang at a year-end investment outlook briefing in New York on Nov. 13.

“Diversified international and emerging market products will continue to garner attention as investors seek out low-cost, diversified ways to take on added risk in hopes of achieving higher returns,” Rosenbluth writes in an analyst note.

5) PIMCO Total Return ETF

For investors who want to remain in the fixed income space, S&P Capital IQ’s Rosenbluth recommends the PIMCO Total Return ETF (BOND) as a fund that will continue to gather additional assets in 2013. BOND is the fastest growing and largest actively managed ETF ever for two good reasons: it’s a solid performer and it’s managed by bond guru Bill Gross.

“This is a watershed event. You’re taking the largest actively managed mutual fund and making it more accessible, more transparent and cheaper, which is appealing to many potential investors,” Rosenbluth told AdvisorOne when the ETF launched back in March.

Through November, the ETF has grown to $3.7 billion in assets.

“Inflows to fixed income ETFs will continue at a rapid pace as investors hunt for yield at low cost,” Rosenbluth wrote in an analyst note published on Dec. 10. “PIMCO Total Return ETF follows a strategy similar to that of a mutual fund with the same name … while SPDR Barclays Capital Short Term High Yield Bond (SJNK) added more than $500 million in just eight-plus months. With the yield on the 10-year Treasury note likely to remain below 2% in 2013, we think investors will continue to see the benefits of these ETFs.”